This is one of the most popular programs: Conventional loans are widely used for a variety of borrowing needs, including purchasing a home for primary residence or investment purposes. This type of loan is popular due to its flexibility in terms of loan duration and fixed interest rates.
Fixed-rate terms: Borrowers can choose from 30-year, 20-year, 15-year, or 10-year fixed-rate loans. A fixed-rate means the interest rate remains constant throughout the entire loan term, allowing borrowers to plan their payments with confidence and stability.
Income verification: When applying for a conventional loan, the borrower’s income will be verified to ensure they have the financial capability to repay the loan. Typically, the borrower’s debt-to-income ratio (DTI) must be below 50%, meaning their monthly debt payments should not exceed half of their total monthly income.
Minimum credit score requirement: require a minimum credit score of 620. This indicates that the borrower must have a good credit history with no significant negative marks on their credit report. A higher credit score increases the likelihood of qualifying for a lower interest rate.
Loan-to-Value (LTV) ratio: For first-time homebuyers purchasing a primary residence, the loan-to-value ratio can go up to 97%, meaning the borrower needs to put down only 3% as a down payment. For investors purchasing investment properties, the loan-to-value ratio can go up to 80%, requiring a minimum of 20% down payment.
Adjustable Rate Mortgages (ARM)
Typically start with a lower fixed interest ratefor an initial period (e.g., 5, 7, or 10 years), after which the rate adjusts annually.
Initial Interest Rate: Usually lower than a fixed-rate mortgage, making it more affordable during the initial period.
Interest Rate Adjustment: After the initial fixed period, the interest rate will adjust based on a specified index (such as the LIBOR or SOFR) plus a margin, the "margin" is a fixed percentage added to the index rate (a benchmark interest rate) to determine the interest rate that a borrower will pay after the initial fixed-rate period ends. Example: If your ARM has a margin of 2.5% and the current index rate is 1.5%, your new interest rate after the adjustment would be 4% (1.5% + 2.5%).
Loan to Value (LTV):
Up to 97% LTV for primary residences.
Up to 80% LTV for investment properties.
Credit Score: Minimum credit score required is typically 620, but may vary based on the lender and specific program.
Income Verification: Income will be verified, and the debt-to-income ratio (DTI) usually needs to be below 50%.
Caps on Adjustments: There are usually caps on how much the interest rate can increase during the adjustment periods and over the life of the loan (e.g., a 2/2/5 cap means a 2% maximum increase at each adjustment, with a 5% maximum increase over the life of the loan). Example: In an ARM with a 2/2/5 cap, First Adjustment Cap (2%): The interest rate can increase by a maximum of 2% after the initial fixed period. Subsequent Adjustment Cap (2%): Each year after that, the rate can go up by no more than 2% from the previous rate. Lifetime Cap (5%): The total increase over the life of the loan cannot exceed 5% above the initial rate. if your initial rate is 3.5%, the rate could rise to a maximum of 5.5% after the first adjustment and never go higher than 8.5% throughout the loan term.
Risk and Flexibility: While ARMs offer lower initial rates and payments, they carry the risk of increasing rates over time, making them suitable for borrowers who plan to sell or refinance before the adjustment period begins
